-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UMQJqfDYoFC+2OnGsxINoj+pVrFilFY6jCKbv2X0gd1gGLFa+MamP/xQtgiX1B// G7L0Di1BzzZIyWTMFEZjEg== 0000950134-98-002675.txt : 19980331 0000950134-98-002675.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950134-98-002675 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST PIPELINE CORP CENTRAL INDEX KEY: 0000110019 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 870269236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07414 FILM NUMBER: 98579255 BUSINESS ADDRESS: STREET 1: 295 CHIPETA WAY CITY: SALT LAKE CITY STATE: UT ZIP: 84158-0900 BUSINESS PHONE: 8015838800 MAIL ADDRESS: STREET 1: 295 CHIPETA WAY CITY: SALT LAKE STATE: UT ZIP: 84158 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K --------- [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the Transition Period from ____________________ to ______________________ Commission File number 1-7414 NORTHWEST PIPELINE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 87-0269236 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 295 Chipeta Way, Salt Lake City, Utah 84108 (Address of principal executive offices) (Zip Code) (801) 583-8800 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class On Which Registered -------------------------- ----------------------- 6.625% Debentures due 2007 New York Stock Exchange 10.65% Debentures due 2018 New York Stock Exchange 9% Debentures due 2022 New York Stock Exchange 7.125% Debentures due 2025 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this form 10-K [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. No voting stock of registrant is held by non-affiliates. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 27, 1998 - ------------------------- ----------------------------- Common Stock, $1 par value 1,000 shares Documents Incorporated by References: None The registrant meets the conditions set forth in General Instruction (l)(1)(a) and (b) of Form 10-K and is therefore filing this form 10-K with the reduced disclosure format. 2 TABLE OF CONTENTS PART I
Heading Page - ------- ---- Items 1. and 2. BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Omitted) . . . . . . . . . . . . . . 4 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK- HOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 6. SELECTED FINANCIAL DATA (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . 9 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Omitted) . . . . . . . . . . . . . . 27 Item 11. EXECUTIVE COMPENSATION (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Omitted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Omitted) . . . . . . . . . . . . . . . . 27 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3 NORTHWEST PIPELINE CORPORATION FORM 10-K PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES BUSINESS ENVIRONMENT Effective May 1, 1997, Northwest Pipeline Corporation ("Pipeline") became a wholly-owned subsidiary of Williams Interstate Natural Gas Systems, Inc., ("WINGS") which is a wholly-owned subsidiary of The Williams Companies, Inc. ("Williams"). Prior to May 1, 1997, Pipeline was a wholly-owned subsidiary of Williams. Pipeline owns and operates an interstate natural gas pipeline system, including facilities for mainline transmission and gas storage. Pipeline's transmission and storage activities are subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 ("Natural Gas Act") and under the Natural Gas Policy Act of 1978 ("NGPA"), and, as such, its rates and charges for the transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of its jurisdictional facilities, and its accounting, among other things, are subject to regulation. Pipeline has significant future opportunities to provide service to meet the demands of growing gas markets. Pipeline's geographical position allows access to the incremental sources of supply required for these markets. TRANSMISSION Pipeline owns and operates a pipeline system for the mainline transmission of natural gas. This system extends from the San Juan Basin in northwestern New Mexico and southwestern Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near Sumas, Washington. At December 31, 1997, Pipeline's system, having an aggregate mainline deliverability of approximately 2.5 Bcf* of gas per day, was composed of approximately 3,900 miles of mainline and branch transmission pipelines, and 40 mainline compressor stations with a combined capacity of approximately 307,000 horsepower. Pipeline operates under an open-access transportation certificate wherein gas is transported for third party shippers. Pipeline's transportation services (firm and interruptible) represented 100% of its total throughput in 1997, 1996 and 1995. In 1997, Pipeline transported natural gas for a total of 153 customers. Pipeline provides services for markets in California, New Mexico, Colorado, Utah, Nevada, Wyoming, Idaho, Oregon and Washington. Transportation customers include distribution companies, municipalities, interstate and intrastate pipelines, gas marketers and direct industrial users. The four largest transportation customers of Pipeline in 1997 accounted for approximately 14.7%, 13.4%, 11.4% and 10.2%, respectively, of total transportation volumes. No other customer accounted for more than 10% of total volumes moved on Pipeline's mainline system. Pipeline's firm transportation agreements are generally long-term agreements with various expiration dates and account for the major portion of Pipeline's business. Additionally, Pipeline offers interruptible transportation service under agreements that are generally short term. - -------------------------- * The term "Mcf" means thousand cubic feet, "MMcf" means million cubic feet and "Bcf" means billion cubic feet. All volumes of natural gas are stated at a pressure base of 14.73 pounds per square inch absolute at 60 degrees Fahrenheit. The term "MMBtu" means one million British Thermal Units and "TBtu" means one trillion British Thermal Units. 4 No other interstate natural gas pipeline company presently provides significant service to Pipeline's primary gas consumer market area. However, competition with other interstate carriers exists for expansion markets. Competition also exists with alternate fuels. Electricity and distillate fuel oil are the primary alternate energy sources in the residential and commercial markets. In the industrial markets, high sulfur residual fuel oil is the main alternate fuel source. Pipeline believes that strong economies in the Pacific Northwest and the growing preference for natural gas in response to environmental concerns support future expansions of its mainline capacity, although no significant expansions are in the development stage at the present time. GAS STORAGE Underground gas storage facilities enable Pipeline to balance daily receipts and deliveries and provide storage services to certain major customers. Pipeline has a contract with a third party, under which gas storage services are provided to Pipeline in an underground storage reservoir in the Clay Basin Field located in Daggett County, Utah. Pipeline injects its own gas into the storage reservoir and is authorized to utilize the Clay Basin Field at a seasonal storage level of 6.1 Bcf of working gas, with a firm delivery capability of 51 MMcf of gas per day. Pipeline owns a one-third interest in the Jackson Prairie underground storage facility located near Chehalis, Washington, with the remaining interests owned by two of Pipeline's distribution customers. The authorized seasonal storage capacity of the facility is 15.1 Bcf of working gas. The facility provides peak day deliveries to Pipeline of up to 550 MMcf per day on a firm basis and up to an additional 72 MMcf per day on a best-efforts basis. Certain of Pipeline's major customers own the working gas stored at the facility. Pipeline also owns and operates a liquefied natural gas ("LNG") storage facility located near Plymouth, Washington, which provides standby service for Pipeline's customers during extreme peaks in demand. The facility has a total LNG storage capacity equivalent to 2.4 Bcf of gas, liquefaction capability of 12 MMcf per day and regasification capability of 300 MMcf per day. Certain of Pipeline's major customers own the gas stored at the LNG plant. OPERATING STATISTICS The following table summarizes volumes and capacity for the periods indicated:
Year Ended December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Total throughput (TBtu) . . . . . . . . . . . . . . . . 714 834 826 Average Daily Transportation Volumes (TBtu) . . . . . . 2.0 2.3 2.3 Average Daily Firm Reserved Capacity (TBtu) . . . . . . 2.5 2.5 2.4
OTHER REGULATORY MATTERS Pipeline's transportation of natural gas in interstate commerce is subject to regulation by FERC under the Natural Gas Act and the NGPA. Pipeline holds certificates of public convenience and necessity issued by FERC authorizing it to own and operate all pipelines, facilities and properties considered jurisdictional for which certificates are required under the Natural Gas Act. Pipeline is subject to the Natural Gas Pipeline Safety Act of 1968, as amended by Title I of the Pipeline Safety Act of 1979, which regulates safety requirements in the design, construction, operation and maintenance of interstate gas transmission facilities. -2- 5 On April 1, 1993, Pipeline began collecting new rates, subject to refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31, 1995, Pipeline received an order from the FERC on this rate case, which among other issues, supported an equity rate of return of 13.2 percent. In a further order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ") to reconsider the long-term growth component of the equity rate of return formula, and upheld its May 31, 1995 decision on all other issues. On October 22, 1996, the ALJ issued an initial decision which recommended an equity rate of return of 11.62 percent. Pipeline took exception to this decision before the FERC. On June 11, 1997, the FERC issued an order revising its approved equity rate of return to 12.59 percent based on a new policy for industry-wide application that requires the use of forecasts of growth in the gross domestic product as the long-term growth component of the rate of return formula. On July 11, 1997, Pipeline and several parties in the case sought rehearing of the June 11 rate of return on equity decision, seeking to have the FERC reconsider various aspects of its new rate of return on equity policy. On October 16, 1997, the FERC issued an opinion denying rehearing and reaffirming its previous policy pronouncements concerning rate of return on equity, but convened a conference on January 30, 1998 to consider, on an industry-wide basis, issues with respect to pipeline rates of return. Pipeline has sought judicial review of the FERC's order. In addition, Pipeline expects the FERC to further scrutinize its new rate of return on equity policy in rate proceedings of other pipelines or in a further rulemaking proceeding. On November 1, 1994, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed April 29, 1994. This filing sought a revenue increase for a projected deficiency caused by increased costs and the impact of a transportation contract terminated subsequent to the 1993 Rate Case. On November 14, 1995, Pipeline filed an uncontested settlement proposal with the FERC. The FERC approved the Settlement in a Letter Order dated February 14, 1996 and no rehearing petitions were filed with respect to that order. During the second quarter of 1996, Pipeline finalized and paid the settlement refunds, the effects of which are reflected in the accompanying financial statements. The settlement resolved substantially all the issues in this rate case except one regarding Pipeline's postage stamp rate design. A hearing was conducted in July 1996; and subsequently, a decision upholding Pipeline's position was issued by the ALJ. During the first quarter of 1998, the FERC affirmed the ALJ's decision. On February 1, 1996, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate Case"). On October 18, 1996, the Commission issued an order approving a settlement concerning certain liquid revenue credit issues relating to Pipeline's agreement with an affiliate to have liquid hydrocarbon products extracted from Pipeline's transportation stream at Ignacio, Colorado. The litigation of all remaining issues took place in late 1996. Pipeline's rate application seeks a revenue increase for increases in rate base related primarily to the Northwest Natural and Expansion II facilities placed into service December 1, 1995 and increased operating costs primarily associated with an increase in headquarters office rent. During the first quarter of 1998, the ALJ issued an Initial Decision. The ALJ found that the facts of this case continue to support Pipeline's capital structure of 55% equity and 45% debt. The ALJ also determined that Pipeline fits within the average risk range for determining pipeline return on equity. However, the ALJ only allowed a return on equity of 11.2 percent. Pipeline is seeking review of this and other aspects of the ALJ decision. On March 1, 1997, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 30, 1996. The application sought an increase in rates due to a proposed use of a higher depreciation rate which also considers a net negative salvage value for Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates because of impacts relating to the sale of Pipeline's south-end facilities in the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement which would resolve all issues in this rate case. On November 25, 1997, the FERC, over the objection of one dissenting party, issued an order approving all aspects of the settlement. The one dissenting party has sought rehearing of the FERC's order. Pipeline has reflected in its financial statements adjustments as necessary to reflect the provisions of the settlement. OWNERSHIP OF PROPERTY Pipeline's system is owned in fee. However, a substantial portion of Pipeline's system is constructed and maintained pursuant to rights-of-way, easements, permits, licenses or consents on and across properties owned by others. The compressor stations of Pipeline, with appurtenant facilities, are located in whole or in part upon lands owned by Pipeline and upon sites held under leases or permits issued or approved by public authorities. The LNG plant is located on lands owned in fee by Pipeline. Pipeline's debt indentures restrict the sale or disposal of a major portion of its pipeline system. -3- 6 EMPLOYEES At December 31, 1997, Pipeline employed 499 persons, none of whom are represented under collective bargaining agreements. No strike or work stoppage in any of Pipeline's operations has occurred in the past and relations with employees are good. ENVIRONMENTAL MATTERS Pipeline is subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of its business. Management believes that Pipeline is in substantial compliance with existing environmental requirements. Pipeline believes that, with respect to any capital expenditures required to meet applicable standards and regulations, FERC would grant the requisite rate relief so that, for the most part, such expenditures and a return thereon would be permitted to be recovered. Pipeline believes that compliance with applicable environmental requirements is not likely to have a material effect upon Pipeline's earnings or competitive position. FORWARD-LOOKING INFORMATION Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although Pipeline believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. As required by such Act, Pipeline hereby identifies the following important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by Pipeline in forward- looking statements: (i) risks and uncertainties related to changes in general economic conditions in the United States, the availability and cost of capital, changes in laws and regulations to which Pipeline is subject, including tax, environmental and employment laws and regulations, and the cost and effects of legal and administrative claims and proceedings against Pipeline or which may be brought against Pipeline; (ii) risks and uncertainties related to the impact of future federal and state regulation of business activities, including allowed rates of return and the resolution of other matters discussed herein; and (iii) risks and uncertainties related to the ability to develop expanded markets as well as the ability to maintain existing markets. In addition, future utilization of pipeline capacity will depend on energy prices, competition from other pipelines and alternate fuels, the general level of natural gas demand and weather conditions, among other things. Further, gas prices which directly impact transportation and operating profits may fluctuate in unpredictable ways. ITEM 3. LEGAL PROCEEDINGS Other than as described in Note 10 of Notes to Financial Statements and above under Items 1 and 2 - Business and Properties, there are no material pending legal proceedings. Pipeline is subject to ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Since Pipeline meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, this information is omitted. -4- 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Pipeline is wholly-owned by WINGS, a wholly-owned subsidiary of Williams. The payment of dividends by Pipeline on its common stock is restricted under various debt agreements. Under the most restrictive provisions, the amount of Pipeline's retained earnings available for dividends on its common stock as of December 31, 1997, was approximately $147.9 million. In 1997 and 1996, Pipeline paid cash dividends on common stock of $73.6 million and $75.2 million, respectively. ITEM 6. SELECTED FINANCIAL DATA Since Pipeline meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, this information is omitted. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This analysis discusses financial results of Pipeline's operations for the years 1995 through 1997. Variances due to changes in price and volume no longer have a significant impact on revenues, because under its straight-fixed- variable rate design methodology, the majority of Pipeline's overall cost of service is recovered through firm capacity reservation charges in its transportation rates. RESULTS OF OPERATIONS Year Ended December 31, 1997 vs. Year Ended December 31, 1996 Operating revenues increased $3.3 million, or 1%, primarily due to new transportation rates effective March 1, 1997 and a $3.5 million gain on the sale of system balancing gas, partially offset by increases in rate reserves in 1997 and the 1996 recognition of the favorable settlement of a previous rate case and a favorable regulatory decision. Pipeline's transportation service accounted for 94% and 95% of operating revenues for the years ended December 31, 1997 and 1996, respectively. Additionally, 3% and 5% of operating revenues represented gas storage service for the years ended December 31, 1997 and 1996, respectively. Operating expenses increased $3.9 million, or 3%, due primarily to increased depreciation expenses associated with Pipeline's new rates effective March 1, 1997, partially offset by decreased operation and maintenance and general and administrative expenses. Operating income decreased $.5 million primarily due to increases in rate reserves in 1997 and the 1996 recognition of the favorable settlement of a previous rate case and a favorable regulatory decision, significantly offset by lower operation and maintenance and general and administrative expenses and a gain on the sale of system balancing gas. Interest on long-term debt decreased $4.9 million as a result of the early retirement of over $200 million of high-interest debentures under a Williams-wide debt restructuring plan. Other interest increased $5.9 million due to increased revenues subject to refund and use of a revolving credit agreement facility. Year Ended December 31, 1996 vs. Year Ended December 31, 1995 Operating revenues increased $14.5 million, or 6%, due primarily to increased transportation rates effective February 1, 1996, associated with the completion of Pipeline's Northwest Natural and Expansion II facilities in December of 1995, a $4.6 million rate reserve reversal associated with a settlement of a previous rate case in February 1996 and a $3.2 million favorable regulatory decision related to fuel reimbursement, partially offset by the 1995 reversal of certain reserve accruals aggregating $16.3 million including amounts for estimated rate refunds. -5- 8 Pipeline's transportation service accounted for 95% and 93% of operating revenues for the years ended December 31, 1996 and 1995, respectively. Of those amounts, Pipeline's firm transportation service accounted for 99.6% and 99% in the years ended December 31, 1996 and 1995, respectively. The remaining .4% and 1% for each year, respectively, represented interruptible transportation service. Additionally, 5% and 4% of operating revenues represented gas storage service for the years ended December 31, 1996 and 1995, respectively. Operating expenses increased $13 million, or 10%, due primarily to depreciation related to Pipeline's Northwest Natural and Expansion II expansions and higher pension costs and headquarters rent. Operating income increased $1.5 million, or 1%, primarily due to revenues from higher rates associated with Northwest Natural and Expansion II facilities placed in service during December of 1995, the settlement of a previous rate case and a favorable regulatory decision, partially offset by the reversal of certain reserve accruals in 1995, increased depreciation expenses associated with the Northwest Natural and Expansion II facilities and higher pension costs and headquarters office rent. Other income and expenses includes a $6.4 million reserve accrual in 1995 for a lawsuit involving a former transportation customer. Interest on long-term debt increased $4.5 million due to the issuance of $85 million in debentures during the fourth quarter of 1995. The allowance for borrowed funds used during construction decreased $2.7 million resulting from the completion of the mainline expansion project in 1995. FINANCIAL CONDITION AND LIQUIDITY Capital Expenditures and Financing Pipeline's expenditures for property, plant and equipment additions amounted to $44.4 million, $62.8 million and $130.5 million for 1997, 1996 and 1995, respectively. Funds necessary to complete capital projects are expected to come from several sources, including Pipeline's operations and available cash. In addition, Pipeline expects to be able to obtain financing, when necessary, on reasonable terms. To allow flexibility in the timing of issuance of long-term securities, financing may be provided on an interim basis with bank debt and from sources discussed below. Pipeline believes that strong economies in the Pacific Northwest and the growing preference for natural gas in response to environmental concerns support future expansions of its mainline capacity, although no significant expansions are in the development stage at the present time. Pipeline shares in a $1 billion Revolving Credit Facility with Williams and four affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, is $400 million, none of which was used by Pipeline at December 31, 1997. Interest rates vary with current market conditions. The Facility contains restrictions which limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Pipeline. Any borrowings by Pipeline under this Facility are not guaranteed by Williams and are based on Pipeline's financial need and credit worthiness. Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness. OTHER Pipeline owns and operates an interstate natural gas pipeline system including facilities for mainline transmission and gas storage. Pipeline's transmission and storage activities are subject to regulation by the FERC under the Natural Gas Act and under the NGPA, and, as such, its rates and charges for the transportation, the extension, enlargement or abandonment of its jurisdictional facilities, and its accounting, among other things, are subject to regulation. Pipeline is also subject to the National Environmental Policy Act and other Federal and state legislation regulating the environmental aspects of its business. Management believes that Pipeline is in substantial compliance with existing environmental requirements. Pipeline believes that, with respect to any capital expenditures required to meet applicable standards and regulations, FERC would grant the requisite rate relief so that, for the most part, such expenditures and a return thereon would be permitted to be recovered. Pipeline believes that compliance with applicable environmental requirements is not likely to have a material effect upon Pipeline's earnings or competitive position. -6- 9 On April 1, 1993, Pipeline began collecting new rates, subject to refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31, 1995, Pipeline received an order from the FERC on this rate case, which among other issues, supported an equity rate of return of 13.2 percent. In a further order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ") to reconsider the long-term growth component of the equity rate of return formula, and upheld its May 31, 1995 decision on all other issues. On October 22, 1996, the ALJ issued an initial decision which recommended an equity rate of return of 11.62 percent. Pipeline took exception to this decision before the FERC. On June 11, 1997, the FERC issued an order revising its approved equity rate of return to 12.59 percent based on a new policy for industry-wide application that requires the use of forecasts of growth in the gross domestic product as the long-term growth component of the rate of return formula. On July 11, 1997, Pipeline and several parties in the case sought rehearing of the June 11 rate of return on equity decision, seeking to have the FERC reconsider various aspects of its new rate of return on equity policy. On October 16, 1997, the FERC issued an opinion denying rehearing and reaffirming its previous policy pronouncements concerning rate of return on equity, but convened a conference on January 30, 1998 to consider, on an industry-wide basis, issues with respect to pipeline rates of return. Pipeline has sought judicial review of the FERC's order. In addition, Pipeline expects the FERC to further scrutinize its new rate of return on equity policy in rate proceedings of other pipelines or in a further rulemaking proceeding. On November 1, 1994, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed April 29, 1994. This filing sought a revenue increase for a projected deficiency caused by increased costs and the impact of a transportation contract terminated subsequent to the 1993 Rate Case. On November 14, 1995, Pipeline filed an uncontested settlement proposal with the FERC. The FERC approved the Settlement in a Letter Order dated February 14, 1996 and no rehearing petitions were filed with respect to that order. During the second quarter of 1996, Pipeline finalized and paid the settlement refunds, the effects of which are reflected in the accompanying financial statements. The settlement resolved substantially all the issues in this rate case except one regarding Pipeline's postage stamp rate design. A hearing was conducted in July 1996; and subsequently, a decision upholding Pipeline's position was issued by the ALJ. During the first quarter of 1998, the FERC affirmed the ALJ's decision. On February 1, 1996, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate Case"). On October 18, 1996, the Commission issued an order approving a settlement concerning certain liquid revenue credit issues relating to Pipeline's agreement with an affiliate to have liquid hydrocarbon products extracted from Pipeline's transportation stream at Ignacio, Colorado. The litigation of all remaining issues took place in late 1996. Pipeline's rate application seeks a revenue increase for increases in rate base related primarily to the Northwest Natural and Expansion II facilities placed into service December 1, 1995 and increased operating costs primarily associated with an increase in headquarters office rent. During the first quarter of 1998, the ALJ issued an Initial Decision. The ALJ found that the facts of this case continue to support Pipeline's capital structure of 55% equity and 45% debt. The ALJ also determined that Pipeline fits within the average risk range for determining pipeline return on equity. However, the ALJ only allowed a return on equity of 11.2 percent. Pipeline is seeking review of this and other aspects of the ALJ decision. On March 1, 1997, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 30, 1996. The application sought an increase in rates due to a proposed use of a higher depreciation rate which also considers a net negative salvage value for Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates because of impacts relating to the sale of Pipeline's south-end facilities in the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement which would resolve all issues in this rate case. On November 25, 1997, the FERC, over the objection of one dissenting party, issued an order approving all aspects of the settlement. The one dissenting party has sought rehearing of the FERC's order. Pipeline has reflected in its financial statements adjustments as necessary to reflect the provisions of the settlement. See Note 2 of Notes to Financial Statements for fair value of financial instruments. -7- 10 Effect of Inflation Pipeline generally has experienced increased costs in recent years due to the effect of inflation on the cost of labor, materials and supplies, and property, plant and equipment. A portion of the increased labor and materials and supplies cost can directly affect income through increased maintenance and operating costs. The cumulative impact of inflation over a number of years has resulted in increased costs for current replacement of productive facilities. The majority of Pipeline's property, plant and equipment and inventory is subject to ratemaking treatment, and under current FERC practices, recovery is limited to historical costs. While amounts in excess of historical cost are not recoverable under current FERC practices, Pipeline believes it will be allowed to recover and earn a return based on increased actual cost incurred when existing facilities are replaced. Cost-based regulation along with competition and other market factors limit Pipeline's ability to price services or products based upon inflation's effect on costs. Year 2000 Compliance Williams and its wholly-owned subsidiaries which include Pipeline have initiated an enterprise-wide project to address the year 2000 compliance issue for all technology hardware and software, external interfaces with customers and suppliers, operations process control, automation and instrumentation systems, and facility items. The assessment phase of this project as it relates to Pipeline should be substantially complete by the end of the first quarter of 1998. Necessary conversion and replacement activities will begin in 1998 and continue through mid-1999. Testing of systems has begun and will continue throughout the process. Pipeline has initiated a formal communications process with other companies with which Pipeline systems interface or rely on to determine the extent to which those companies are addressing their year 2000 compliance, and where necessary, Pipeline will be working with those companies to mitigate any material adverse effect on Pipeline. Pipeline expects to utilize both internal and external resources to complete this process. Existing resources will be redeployed and previously planned system replacements will be accelerated during this time. For example, implementation pf previously planned financial and human resources systems is currently in process. These systems will address the year 2000 compliance issues in certain areas. Costs incurred for new software and hardware purchases will be capitalized and other costs will be expensed as incurred. Pipeline considers costs associated with the year 2000 compliance to be prudent costs incurred in the ordinary course of business, and, therefore, recoverable through rates. While the total cost of this project is still being evaluated, Pipeline estimates that external costs, excluding previously planned system replacements, necessary to complete the project within the schedule described will be immaterial. Pipeline will update this estimate as additional information becomes available. The costs of the project and the completion dates are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party year 2000 compliance modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from these estimates. Contingencies Reference is made to Note 10 of Notes to Financial Statements for information about regulatory and judicial developments which cause operating and financial uncertainties. -8- 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ---- Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Covered by report of independent auditors: Consolidated statement of income for the years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Consolidated balance sheet at December 31, 1997 and 1996 . . . . . . . . . . . . 12 Consolidated statement of cash flows for the years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 14 Consolidated statement of capitalization for the years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 15 Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . 16 Not covered by report of independent auditors: Quarterly financial data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 26
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. -9- 12 REPORT OF INDEPENDENT AUDITORS The Board of Directors Northwest Pipeline Corporation We have audited the accompanying consolidated balance sheet of Northwest Pipeline Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and capitalization for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Pipeline Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Tulsa, Oklahoma February 13, 1998 -10- 13 NORTHWEST PIPELINE CORPORATION CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) OPERATING REVENUES (Notes 3, 9 and 10) . . . . . . $273,083 $269,740 $255,219 OPERATING EXPENSES: General and administrative . . . . . . . . . . . 46,548 49,045 42,430 Operation and maintenance . . . . . . . . . . . 37,422 44,226 46,040 Depreciation and amortization . . . . . . . . . 50,883 38,877 30,657 Taxes, other than income taxes . . . . . . . . . 13,771 12,626 12,640 148,624 144,774 131,767 Operating income . . . . . . . . . . . . . . 124,459 124,966 123,452 OTHER INCOME (EXPENSES) - net . . . . . . . . . . 2,908 5,356 (689) INTEREST CHARGES: Interest on long-term debt . . . . . . . . . . . 28,908 33,782 29,253 Other interest . . . . . . . . . . . . . . . . . 11,051 5,182 4,228 Allowance for borrowed funds used during construction . . . . . . . . . . . . . (394) (473) (3,146) 39,565 38,491 30,335 INCOME BEFORE INCOME TAXES . . . . . . . . . . . . 87,802 91,831 92,428 PROVISION FOR INCOME TAXES (Note 4) . . . . . . . . 30,626 33,672 33,101 NET INCOME . . . . . . . . . . . . . . . . . . . . $ 57,176 $ 58,159 $ 59,327 CASH DIVIDENDS ON COMMON STOCK . . . . . . . . . . $ 73,616 $ 75,178 $ 20,000
- ----------------------- See accompanying notes. -11- 14 NORTHWEST PIPELINE CORPORATION CONSOLIDATED BALANCE SHEET ================================================================================ ASSETS
December 31, ------------------------- 1997 1996 ---- ---- (Thousands of Dollars) PROPERTY, PLANT AND EQUIPMENT (Note 5) . . . . . . . . . . . . . . . . . $1,471,027 $1,452,181 Less - Accumulated depreciation and amortization . . . . . . . . . . 570,521 550,104 ---------- ----------- 900,506 902,077 Construction work in progress . . . . . . . . . . . . . . . . . . . . 18,819 24,040 ---------- ----------- 919,325 926,117 ---------- ----------- CURRENT ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 627 240 Advances to parent . . . . . . . . . . . . . . . . . . . . . . . . . 71,823 16,676 Accounts receivable - Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,873 31,189 Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . 668 1,229 Materials and supplies (principally at average cost) . . . . . . . . 10,619 10,510 Exchange gas due from others . . . . . . . . . . . . . . . . . . . . 12,859 8,264 Costs recoverable through rate adjustments . . . . . . . . . . . . . - 11,998 Deferred income taxes (Note 4) . . . . . . . . . . . . . . . . . . . 25,867 23,306 Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . 2,597 5,051 ---------- ----------- 151,933 108,463 ---------- ----------- OTHER ASSETS: Deferred charges (Note 1) . . . . . . . . . . . . . . . . . . . . . . 54,181 22,607 ---------- ----------- $1,125,439 $ 1,057,187 ========== ===========
- ----------------------- See accompanying notes. -12- 15 NORTHWEST PIPELINE CORPORATION CONSOLIDATED BALANCE SHEET ================================================================================ LIABILITIES AND STOCKHOLDER'S EQUITY
December 31, ----------------------------- 1997 1996 ---- ---- (Thousands of Dollars) CAPITALIZATION: Common stockholder's equity - Common stock, par value $1 per share, authorized and outstanding, 1,000 shares . . . . . . . . . . . . . . . . . $ 1 $ 1 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 262,844 262,844 Retained earnings (Note 5) . . . . . . . . . . . . . . . . . . . . 162,617 179,485 ---------- ---------- 425,462 442,330 Long-term debt, less current maturities (Note 6) . . . . . . . . . . 408,287 361,424 ---------- ---------- 833,749 803,754 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt (Note 6) . . . . . . . . . . . . 1,667 8,591 Accounts payable - Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,934 16,313 Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . 15,456 8,853 Accrued liabilities - Taxes, other than income taxes . . . . . . . . . . . . . . . . . . 4,044 3,890 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,227 14,676 Employee costs . . . . . . . . . . . . . . . . . . . . . . . . . . 8,103 7,763 Exchange gas due to others . . . . . . . . . . . . . . . . . . . . 9,650 19,817 Costs refundable through rate adjustments . . . . . . . . . . . . 2,766 - Reserves for estimated rate refunds (Note 10) . . . . . . . . . . 74,083 46,795 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,705 7,821 ---------- ---------- 156,635 134,519 ---------- ---------- DEFERRED INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . 126,801 110,699 ---------- ---------- OTHER DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . . . . 8,254 8,215 ---------- ---------- CONTINGENT LIABILITIES AND COMMITMENTS (Note 10) . . . . . . . . . . . . ---------- ---------- $1,125,439 $1,057,187 ========== ==========
- ---------------------- See accompanying notes. -13- 16 NORTHWEST PIPELINE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS ================================================================================
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . $ 57,176 $ 58,159 $ 59,327 Adjustments to reconcile to cash provided by operations- Depreciation and amortization . . . . . . . . . . . 50,883 38,877 30,657 Provision (benefit) for deferred income taxes . . . 13,541 (733) 12,311 Amortization of deferred charges and credits . . . (872) (1,268) 976 Sale of receivables . . . . . . . . . . . . . . . . 10,000 - - Allowance for equity funds used during construction . . . . . . . . . . . . . . . . . . (541) (730) (4,273) Increase (decrease) from changes in: Accounts receivable . . . . . . . . . . . . . . (9,718) 11,195 (7,423) Inventory . . . . . . . . . . . . . . . . . . . (109) 555 2,415 Other current assets . . . . . . . . . . . . . . 17,218 (4,812) (7,294) Other assets and deferred charges . . . . . . . (858) 3,557 (3,952) Accounts payable . . . . . . . . . . . . . . . . 8,201 (5,362) 23,567 Other current liabilities . . . . . . . . . . . 25,171 11,853 5,095 Other deferred credits . . . . . . . . . . . . . 1,233 - (185) Other . . . . . . . . . . . . . . . . . . . . . . . (521) (118) (85) ---------- --------- --------- Net cash provided by operating activities . . . . . . 170,804 111,173 111,136 ---------- --------- --------- INVESTING ACTIVITIES: Property, plant and equipment - Capital expenditures . . . . . . . . . . . . . . . (44,427) (62,778) (130,481) Proceeds from sales . . . . . . . . . . . . . . . . 968 13,485 - Asset removal cost . . . . . . . . . . . . . . . . - - (766) Changes in accounts payable . . . . . . . . . . . . (7,096) (1,056) (5,160) Payments from (advances to) parent . . . . . . . . . . (55,147) 24,539 (29,306) ---------- --------- --------- Net cash used by investing activities . . . . . . . . (105,702) (25,810) (165,713) ---------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . 250,000 - 85,000 Debt issue costs . . . . . . . . . . . . . . . . . . . (6,673) - (1,156) Principal payments on long-term debt . . . . . . . . . (210,557) (10,515) (10,515) Premium on early retirement of long-term debt . . . . (23,869) - - Proceeds from notes payable to banks . . . . . . . . . 207,000 - 23,450 Payments on notes payable to banks . . . . . . . . . . (207,000) - (23,450) Cash dividends paid . . . . . . . . . . . . . . . . . (73,616) (75,178) (20,000) ---------- --------- --------- Net cash (used) provided by financing activities . . . (64,715) (85,693) 53,329 ---------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . 387 (330) (1,248) ---------- --------- --------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . 240 570 1,818 ---------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . $ 627 $ 240 $ 570 ========== ========= =========
- ------------------------ See accompanying notes. -14- 17 NORTHWEST PIPELINE CORPORATION CONSOLIDATED STATEMENT OF CAPITALIZATION ================================================================================
Year Ended December 31, ------------------------------------------------ 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) COMMON STOCKHOLDER'S EQUITY: Common stock, par value $1 per share, authorized and outstanding, 1,000 shares . . . . . $ 1 $ 1 $ 1 -------- -------- -------- Additional paid-in capital - Balance at beginning of period . . . . . . . . . . 262,844 262,440 262,440 Noncash contribution of capital from parent . . -- 404 -- -------- -------- -------- Balance at end of period . . . . . . . . . . . . . 262,844 262,844 262,440 -------- -------- -------- Retained earnings (Note 5) - Balance at beginning of period . . . . . . . . . . 179,485 197,019 164,536 Net income . . . . . . . . . . . . . . . . . . . 57,176 58,159 59,327 Cash dividends . . . . . . . . . . . . . . . . . (73,616) (75,178) (20,000) Noncash dividend (Note 5) . . . . . . . . . . . (428) (515) (6,844) -------- -------- -------- Balance at end of period . . . . . . . . . . . . . 162,617 179,485 197,019 -------- -------- -------- Total common stockholder's equity . . . . . . . 425,462 442,330 459,460 -------- -------- -------- LONG-TERM DEBT (Note 6): Debentures - 6.625%, payable 2007 . . . . . . . . . . . . . . . 250,000 -- -- 7.125%, payable 2025 . . . . . . . . . . . . . . . 84,683 84,672 85,000 9%, payable through 2001 . . . . . . . . . . . . . - 7,500 12,500 9%, payable 2003 through 2022 . . . . . . . . . . . 32,941 149,390 149,351 9.25%, payable through 2006 . . . . . . . . . . . . - 11,532 15,380 10.65%, payable 1999 through 2018 . . . . . . . . . 34,000 100,000 100,000 Adjustable rate notes, payable through 2002 . . . . . 6,663 8,330 9,997 -------- -------- -------- Total long-term debt . . . . . . . . . . . . . . 408,287 361,424 372,228 -------- -------- -------- Total capitalization . . . . . . . . . . . . . . $833,749 $803,754 $831,688 ======== ======== ========
- ------------------------ See accompanying notes. -15- 18 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Effective May 1, 1997, Northwest Pipeline Corporation ("Pipeline") became a wholly-owned subsidiary of Williams Interstate Natural Gas Systems, Inc., which is a wholly-owned subsidiary of The Williams Companies, Inc. ("Williams"). Prior to May 1, 1997, Pipeline was a wholly-owned subsidiary of Williams. Pipeline owns and operates a pipeline system for the mainline transmission of natural gas. This system extends from the San Juan Basin in northwestern New Mexico and southwestern Colorado through Colorado, Utah, Wyoming, Idaho, Oregon and Washington to a point on the Canadian border near Sumas, Washington. Certain 1996 and 1995 items in Pipeline's consolidated financial statements have been reclassified to conform to the 1997 presentation. Basis of Presentation Financial position of Pipeline as of December 31, 1997 and the results of operations and cash flows for the year ended December 31, 1997 include the operating results of NWP Enterprises ("Enterprises"), a wholly owned subsidiary of Pipeline, since its incorporation on January 2, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Property, Plant and Equipment Property, plant and equipment ("plant"), consisting principally of natural gas transmission facilities, is recorded at original cost. Expenditures which materially increase values or capacities or extend useful lives of plant are capitalized. Routine maintenance, repairs and renewal costs are charged to income as incurred. Gains or losses from the ordinary sale or retirement of plant are charged or credited to accumulated depreciation and amortization ("D&A"). Depreciation is provided by the straight-line method for transmission plant over its useful life. The composite annual D&A rate was 2.86%, 2.18% and 2.19% for 1997, 1996 and 1995, respectively, including an allowance for negative salvage beginning in 1997. Allowance for Borrowed and Equity Funds Used During Construction Allowance for funds used during construction ("AFUDC") represents the estimated cost of borrowed and equity funds applicable to utility plant in process of construction. Recognition is made of this item as a cost of utility plant because it constitutes an actual cost of construction under established regulatory practices. The Federal Energy Regulatory Commission ("FERC") has prescribed a formula to be used in computing separate allowances for borrowed and equity AFUDC. The composite rate used to capitalize AFUDC was approximately 10.6%, 11.6% and 11.8% for 1997, 1996 and 1995, respectively. Equity AFUDC of $.5 million, $.7 million and $4.3 million for 1997, 1996 and 1995, respectively, is reflected in other income. Income Taxes Pipeline is included in Williams' consolidated federal income tax return. Pipeline's Federal income tax provisions are computed as though separate tax returns are filed. Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of Pipeline's assets and liabilities. -16- 19 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ Deferred Charges Pipeline amortizes deferred charges over varying periods consistent with FERC approved accounting treatment for such deferred items. Unamortized debt expense, debt discount and gains or losses on reacquired long-term debt are amortized by the bonds outstanding method over the related debt repayment periods. Cash and Cash Equivalents Cash and cash equivalents include demand and time deposits, certificates of deposit and other marketable securities with a term to maturity of three months or less when acquired. Exchange Gas Imbalances In the course of providing transportation services to customers, Pipeline may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. These transactions result in imbalances which are typically settled through the receipt or delivery of gas in the future although some may be settled in cash. Customer imbalances to be repaid or recovered in-kind are recorded as exchange gas due from others or due to others in the accompanying balance sheets. Settlement of imbalances requires agreement between the pipelines and shippers as to allocations of volumes to specific transportation contracts and timing of delivery of gas based on operational conditions. Revenue Recognition Pipeline recognizes revenues for the transportation of natural gas based upon contractual terms and the related transported volume through month end. Pursuant to FERC regulations, a portion of the revenues being collected may be subject to possible refunds upon final orders in pending cases. Pipeline establishes financial reserves for such contingencies based on the facts and circumstances of the pending case. Environmental Matters Pipeline is subject to Federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. Pipeline believes that, with respect to any expenditures required to meet applicable standards and regulations, FERC would grant the requisite rate relief so that, for the most part, such expenditures would be permitted to be recovered. Pipeline believes that compliance with applicable environmental requirements is not likely to have a material effect upon Pipeline's financial position. Interest Payments Cash payments for interest were $35.5 million, $33.4 million and $27.8 million, net of $.4 million, $.5 million and $3.1 million of interest capitalized in 1997, 1996 and 1995, respectively. (2) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FAS No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by Pipeline, using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Pipeline could realize in a current market exchange. The use and complexity of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. -17- 20 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents - The carrying amount of these items are assumed to be indicative of their fair value. Long-term debt - The fair value of Pipeline's publicly traded long-term debt is valued using year-end traded market prices. Private debt is valued based on the prices of similar securities with similar terms and credit ratings. Pipeline used the expertise of an outside investment banking firm to estimate the fair value of long-term debt. The carrying amount and estimated fair value of Pipeline's long term debt, including current maturities, were $410 million and $417 million, respectively, at December 31, 1997, and $370 million and $386 million, respectively, at December 31, 1996. (3) REVENUES ATTRIBUTABLE TO MAJOR CUSTOMERS During some or all of the periods presented, more than 10% of Pipeline's operating revenues were generated from each of the following customers who are large distribution companies.
Year Ended December 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) Washington Natural Gas Co. $46,540 $41,687 $47,219 Northwest Natural Gas Co. 46,213 41,378 31,232 IGI Resources, Inc. 32,323 23,295 14,279 Pacific Interstate Transmission 28,971 27,929 25,938 Cascade Natural Gas Corp. 28,337 25,849 25,382
Pipeline's major customers are located in the Pacific Northwest. As a general policy, collateral is not required for receivables, but customers' financial condition and credit worthiness are regularly evaluated and historical losses have been minimal. A portion of the revenues reflected above may be subject to refund due to Pipeline's pending rate cases as discussed in Note 10. -18- 21 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ (4) INCOME TAXES Significant components of the deferred tax liabilities and assets are as follows:
December 31, ----------------------- (Thousands of Dollars) 1997 1996 ---- ---- Property, plant and equipment $ 118,434 $ 111,935 Regulatory assets 5,401 5,541 Loss on reacquired debt 10,818 -- Other - net 746 123 --------- --------- Deferred tax liabilities 135,399 117,599 --------- --------- Rate refunds (22,250) (19,500) Regulatory liabilities (2,680) (3,113) Accrued liabilities (5,777) (4,324) State deferred taxes (3,758) (3,269) --------- --------- Deferred tax assets (34,465) (30,206) --------- --------- Net deferred tax liabilities $ 100,934 $ 87,393 ========= ========= Reflected as: Deferred income taxes - asset $ (25,867) $ (23,306) Deferred income taxes - liability 126,801 110,699 --------- --------- $ 100,934 $ 87,393 ========= =========
The provision (benefit) for income taxes includes:
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) Current: Federal . . . . . . . . . . . . . . . . . . $ 15,708 $ 32,053 $ 18,536 State . . . . . . . . . . . . . . . . . . . 1,377 2,352 2,254 --------- -------- --------- 17,085 34,405 20,790 Deferred: Federal . . . . . . . . . . . . . . . . . . 12,144 (702) 11,001 State . . . . . . . . . . . . . . . . . . . 1,397 (31) 1,310 --------- -------- --------- 13,541 (733) 12,311 --------- -------- --------- Total provision . . . . . . . . . . . . . . . . $ 30,626 $ 33,672 $ 33,101 ========= ======== =========
-19- 22 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ A reconciliation of the statutory Federal income tax rate to the provision for income taxes on continuing operations is as follows:
Year Ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (Thousands of Dollars) Provision at statutory Federal income tax rate of 35% . . . . . . . . . . . . . . . . . . . . . $30,731 $32,142 $32,350 Increase (decrease) in tax provision resulting from - Federal audits . . . . . . . . . . . . . . . . . . . -- 156 (1,593) State income taxes net of Federal tax benefit 1,842 2,425 2,531 State Investment Tax Credit . . . . . . . . . . . . . -- (865) -- Other - net . . . . . . . . . . . . . . . . . . . . . (1,947) (186) (187) ------- ------- ------- Provision for income taxes . . . . . . . . . . . . $30,626 $33,672 $33,101 ======= ======= ======= Effective tax rate . . . . . . . . . . . . . . . . . . . 34.88% 36.67% 35.81% ======= ======= =======
Net cash payments made to Williams for income taxes were $13.1 million, $25.2 million and $27 million in 1997, 1996 and 1995, respectively. (5) RETAINED EARNINGS Noncash Dividends On May 1, 1995, Pipeline transferred an aircraft, net of associated deferred income tax liabilities, to Williams by dividend. This asset had a net book value of $5.5 million. On December 31, 1995, Pipeline transferred the Green River Area Office, net of associated deferred income tax liabilities, to Williams by dividend. This asset had a net book value of $1.3 million. On December 31, 1996, Pipeline transferred certain telecommunication and gas transmission assets, net of associated deferred income tax liabilities, to Williams by dividend. These assets, which are not included in the accompanying balance sheet as of December 31, 1996, had a net book value of $.5 million. Restrictions Pipeline's debt indentures contain provisions limiting common stock dividends. Under the most restrictive provisions, the amount of Pipeline's retained earnings available for dividends on its common stock as of December 31, 1997, was approximately $147.9 million. -20- 23 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ (6) LONG-TERM DEBT, LEASES AND BANKING ARRANGEMENTS Debt Covenants The terms of Pipeline's debt indentures preclude the issuance of mortgage bonds. The indentures contain provisions for the acceleration of repayment or the reset of interest rates under certain conditions. Pipeline's debt indentures also contain restrictions which, under certain circumstances, limit the issuance of additional debt, restrict the payment of cash dividends and restrict the disposal of a major portion of its natural gas pipeline system. Long-Term Debt On May 31, 1996, Pipeline called $1.9 million of its outstanding 9.25% Series C Debentures, due 2006, under terms of the optional prepayment provisions in the debenture agreement. The prepayment was in addition to the scheduled May 31, 1996 sinking fund payments of $5 million for the 9% Series B and $1.9 million for the 9.25% Series C. On May 31, 1997, Pipeline called $.5 million of its outstanding 9.25% Series C Debentures, due 2006 under terms of the optional prepayment provisions in the debenture agreement. The prepayment was in addition to the scheduled May 31, 1997 sinking fund payments of $5 million for the 9% Series B and $1.9 million for the 9.25% Series C. On September 8, 1997, Pipeline filed a registration statement for issuance of up to $350 million in public debt securities in conjunction with the announcement of Williams' debt restructuring plan to reduce annual interest expense. On December 3, 1997, $250 million was marketed and priced with an interest rate of 6.625%. On December 8, 1997, Pipeline received net proceeds after issuance costs of approximately $248.4 million. The terms of the offering include a 10-year no-call life, maturing December 1, 2007, and no sinking fund requirement. Between September 8, 1997 and September 19, 1997, Pipeline purchased, through a tender offer, $66 million of its 10.65% Debentures, due 2018, and $117 million of its 9% Debentures, due 2022, at premiums of $6.8 million and $15.9 million, respectively. The early redemption premiums and fees, the unamortized debt expenses on both issues and the unamortized debt discount on the 9% Debentures, totaling $7.3 million for the 10.65% Debentures and $17.6 million for the 9% Debentures, are being amortized over the life of the retired debt. The Revolving Credit Facility (see below) was used to fund the tender offer. During October 1997, Pipeline made negotiated prepayments of the remaining $11.1 million of its 9.25% Series C Debentures, due 2006, with redemption premiums totaling $1 million. The early redemption premiums and the unamortized debt expense associated with the prepaid 9.25% Series C Debentures, totaling $1.1 million, will be amortized over the life of the retired debt. Excess funds previously advanced to Williams were used to fund the prepayment and premium. On October 15, 1997, Pipeline made an optional prepayment with a redemption premium of the remaining $7.5 million of its 9% Series B Debentures, due 2001. The early redemption premium and the unamortized debt expense associated with the 9% Series B Debentures, totaling $.2 million, will be amortized over the life of the retired debt. Excess funds previously advanced to Williams were used to fund the prepayment and premium. Adjustable Interest Rate Notes The interest rate on these notes will be adjusted periodically based on a calculation using the United States Treasury Rate, but will never exceed 25% or be less than 9% per annum. The interest rate at December 31, 1997 was 9%. -21- 24 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ Sinking Fund Requirements and Maturities As of December 31, 1997, cumulative sinking fund requirements and other maturities of long-term debt for each of the next five years are as follows:
(Thousands of Dollars) ----------- 1998 . . . 1,667 1999 . . . 6,667 2000 . . . 6,667 2001 . . . 6,667 2002 . . . 6,662
Line-of-Credit Arrangements Pipeline shares in a $1 billion Revolving Credit Facility with Williams and four affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, is $400 million, none of which was used by Pipeline at December 31, 1996 or 1997. Interest rates vary with current market conditions. The Facility contains restrictions which limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Pipeline. Any borrowings by Pipeline under this Facility are not guaranteed by Williams and are based on Pipeline's financial need and credit worthiness. Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness. Leases Pipeline's leasing arrangements include mostly premise and equipment leases that are classified as operating leases. The major operating lease is a leveraged lease which became effective during 1982 for Pipeline's headquarters building. The agreement has an initial term of approximately 27 years, with options for consecutive renewal terms of approximately 9 years and 10 years. The major component of the lease payment is set through the initial and first renewal terms of the lease except for a potential one time adjustment in 1995 to track an allowed interest rate change on a portion of the lessor's debt. Various purchase options exist under the building lease, including options involving adverse regulatory development. Following are the estimated future minimum yearly rental payments required under operating leases which have initial or remaining noncancelable lease terms in excess of one year:
(Thousands of Dollars) ----------- 1998 . . . . . . . $ 8,757 1999 . . . . . . . 8,757 2000 . . . . . . . 8,757 2001 . . . . . . . 8,757 2002 . . . . . . 8,757 Thereafter . . . . 80,888 -------- Total . . . . . $124,673 ========
Operating lease rental expense amounted to $8 million, $8.1 million and $4.9 million for 1997, 1996 and 1995, respectively. Capital lease payments for the periods presented are not significant. -22- 25 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ (7) EMPLOYEE BENEFIT PLANS Pipeline's employees are covered by Williams' noncontributory defined benefit pension plan. Benefits are based on years of service and average final compensation. Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement Income Security Act of 1974. Pipeline accrued pension expense of $3 million, $2.1 million and $.8 million in 1997, 1996 and 1995, respectively. Such accrued expenses have been or are being funded currently. Substantially all retirees who were hired prior to January 1, 1992, are provided medical benefits under the Williams' plan. Employees hired after January 1, 1992 will not be provided postretirement medical benefits. During 1997, 1996 and 1995, the expense of providing medical benefits to retirees was approximately $2.3 million, $2.5 million and $2.3 million, respectively. Williams maintains various defined contribution plans covering substantially all employees. Company contributions are based on employees' compensation and, in part, match employee contributions. All Company contributions are invested in Williams stock. Contributions by Pipeline to these plans totaled $1.5 million, $1.5 million and $1.6 million for the years 1997, 1996 and 1995, respectively. (8) STOCK-BASED COMPENSATION Williams has several plans providing for common stock-based awards to its employees and employees of its subsidiaries. The plans permit the granting of various types of awards including, but not limited to, stock options, stock appreciation rights, restricted stock and deferred stock. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. Stock options generally become exercisable after five years, subject to accelerated vesting if certain future stock prices are achieved. Stock options expire 10 years after grant. Williams' employee stock-based awards are accounted for under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Williams' fixed plan common stock options do not result in compensation expense, because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. FAS No. 123, "Accounting for Stock-Based Compensation," requires that companies who continue to apply APB Opinion No. 25 disclose pro forma net income assuming that the fair-value method in FAS 123 had been applied in measuring compensation cost. Pro forma net income for Pipeline was $56.1 million, $58.1 million and $58.5 million for 1997, 1996 and 1995, respectively. Reported net income was $57.2 million, $58.2 million and $59.3 million for 1997, 1996 and 1995, respectively. Pro forma amounts for 1997 include the remaining total compensation expense from the awards made in 1996, as these awards fully vested in 1997 as a result of the accelerated vesting provisions. Pro forma amounts for 1995 reflect total compensation expense from the awards made in 1995 as these awards fully vested as a result of the accelerated vesting provisions. Since compensation expense from stock options is recognized over the future years' vesting period, and additional awards generally are made each year, pro forma amounts may not be representative of future years' amounts. Stock options granted to employees of Pipeline in 1997 and 1996 were 288,384 shares and 452,002 shares, respectively, at a weighted average grant date fair value of $5.98 and $3.92, respectively. Stock options outstanding and options exercisable for employees of Pipeline were 1,185,523 shares and 901,139 shares, respectively, at December 31, 1997 and 1,104,092 shares and 550,602 shares, respectively, at December 31, 1996. -23- 26 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ (9) RELATED PARTY TRANSACTIONS Williams' corporate overhead expenses allocated to Pipeline were $3.9 million, $4.8 million and $4 million for 1997, 1996 and 1995, respectively. Such expenses have been allocated to Pipeline by Williams, primarily based on the Massachusetts formula until April 30, 1995 and the Modified Massachusetts formula thereafter, which are FERC approved methods utilizing a combination of operating revenues or net revenues, gross payroll and gross plant for the allocation base. In addition, Williams or an affiliate has provided executive, data processing, legal, aviation, internal audit and other administrative services to Pipeline on a direct charge basis which amounted to $3 million, $3.8 million and $3.2 million for 1997, 1996 and 1995, respectively. In addition, Pipeline received interest income from advances to parent of $1.8 million, $1.9 million, and $1.1 million during 1997, 1996 and 1995, respectively. During the periods presented, Pipeline's revenues reflect transportation and exchange transactions with subsidiaries of Williams. Combined revenues for these activities totaled $2.8 million, $1.3 million and $1.8 million for 1997, 1996 and 1995, respectively. Pipeline has entered into various other transactions with certain related parties, the amounts of which were not significant. These transactions and the above described transactions are charged on the basis of commercial relationships and prevailing market prices or general industry practices. (10) CONTINGENT LIABILITIES AND COMMITMENTS Pending Rate Cases On April 1, 1993, Pipeline began collecting new rates, subject to refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31, 1995, Pipeline received an order from the FERC on this rate case, which among other issues, supported an equity rate of return of 13.2 percent. In a further order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ") to reconsider the long-term growth component of the equity rate of return formula, and upheld its May 31, 1995 decision on all other issues. On October 22, 1996, the ALJ issued an initial decision which recommended an equity rate of return of 11.62 percent. Pipeline took exception to this decision before the FERC. On June 11, 1997, the FERC issued an order revising its approved equity rate of return to 12.59 percent based on a new policy for industry-wide application that requires the use of forecasts of growth in the gross domestic product as the long-term growth component of the rate of return formula. On July 11, 1997, Pipeline and several parties in the case sought rehearing of the June 11 rate of return on equity decision, seeking to have the FERC reconsider various aspects of its new rate of return on equity policy. On October 16, 1997, the FERC issued an opinion denying rehearing and reaffirming its previous policy pronouncements concerning rate of return on equity, but convened a conference on January 30, 1998 to consider, on an industry-wide basis, issues with respect to pipeline rates of return. Pipeline has sought judicial review of the FERC's order. In addition, Pipeline expects the FERC to further scrutinize its new rate of return on equity policy in rate proceedings of other pipelines or in a further rulemaking proceeding. On November 1, 1994, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed April 29, 1994. This filing sought a revenue increase for a projected deficiency caused by increased costs and the impact of a transportation contract terminated subsequent to the 1993 Rate Case. On November 14, 1995, Pipeline filed an uncontested settlement proposal with the FERC. The FERC approved the Settlement in a Letter Order dated February 14, 1996 and no rehearing petitions were filed with respect to that order. During the second quarter of 1996, Pipeline finalized and paid the settlement refunds, the effects of which are reflected in the accompanying financial statements. The settlement resolved substantially all the issues in this rate case except one regarding Pipeline's postage stamp rate design. A hearing was conducted in July 1996; and subsequently, a decision upholding Pipeline's position was issued by the ALJ. During the first quarter of 1998, the FERC affirmed the ALJ's decision. -24- 27 NORTHWEST PIPELINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ On February 1, 1996, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate Case"). On October 18, 1996, the Commission issued an order approving a settlement concerning certain liquid revenue credit issues relating to Pipeline's agreement with an affiliate to have liquid hydrocarbon products extracted from Pipeline's transportation stream at Ignacio, Colorado. The litigation of all remaining issues took place in late 1996. Pipeline's rate application seeks a revenue increase for increases in rate base related primarily to the Northwest Natural and Expansion II facilities placed into service December 1, 1995 and increased operating costs primarily associated with an increase in headquarters office rent. During the first quarter of 1998, the ALJ issued an Initial Decision. The ALJ found that the facts of this case continue to support Pipeline's capital structure of 55% equity and 45% debt. The ALJ also determined that Pipeline fits within the average risk range for determining pipeline return on equity. However, the ALJ only allowed a return on equity of 11.2 percent. Pipeline is seeking review of this and other aspects of the ALJ decision. On March 1, 1997, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 30, 1996. The application sought an increase in rates due to a proposed use of a higher depreciation rate which also considers a net negative salvage value for Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates because of impacts relating to the sale of Pipeline's south-end facilities in the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement which would resolve all issues in this rate case. On November 25, 1997, the FERC, over the objection of one dissenting party, issued an order approving all aspects of the settlement. The one dissenting party has sought rehearing of the FERC's order. Pipeline has reflected in its financial statements adjustments as necessary to reflect the provisions of the settlement. Significant Litigation In October 1995, Pipeline received a judge's order following a non-jury trial involving claims arising from a transportation agreement of a former customer. In the decision, which was amended in January 1996, it was held that Pipeline was liable to the former customer in the amount of $5.3 million, plus interest. Although Pipeline recorded charges to "other expenses" and "other interest charges" in 1995, Pipeline is appealing the decision. On July 18, 1996, an individual filed a lawsuit in the United States District Court for the District of Columbia against 70 natural gas pipelines and other gas purchasers or former gas purchasers. All of the Williams' natural gas pipeline subsidiaries were named as defendants in the lawsuit. The plaintiff claimed, on behalf of the United States under the False Claims Act, that the pipelines had incorrectly measured the heating value or volume of gas purchased by the defendants. The plaintiff claimed that the United States had lost royalty payments as a result of these practices. In 1997, the court dismissed the plaintiff's case and issued a ruling that the plaintiff must refile the suit against each of the pipelines individually. The plaintiff made such filings and the court is currently determining whether or not to accept the case. Other Legal and Regulatory Matters In addition to the foregoing, various other proceedings are pending against Pipeline incidental to its operations. Summary of Contingent Liabilities Management believes that the ultimate resolution of the foregoing matters, after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a materially adverse effect upon Pipeline's future financial position, results of operations, and future cash flow requirements. Other Matters Commitments for construction and acquisition of property, plant and equipment are approximately $6.9 million at December 31, 1997. -25- 28 NORTHWEST PIPELINE CORPORATION QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly financial data for 1997 and 1996:
Quarter of 1997 ------------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ (Thousands of Dollars) Operating revenues . . . . . . . . . . . . $ 67,206 $ 66,050 $ 71,197 $ 68,630 Operating income . . . . . . . . . . . . . 29,441 29,731 35,569 29,718 Net income . . . . . . . . . . . . . . . . 14,493 11,361 18,526 12,796
Quarter of 1996 ------------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ (Thousands of Dollars) Operating revenues . . . . . . . . . . . . $ 67,584 $ 68,868 $ 69,188 $ 64,100 Operating income . . . . . . . . . . . . . 32,488 34,328 35,969 22,181 Net income . . . . . . . . . . . . . . . . 15,178 15,547 19,400 8,034
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -26- 29 PART III Since Pipeline meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, this information is omitted. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)1 AND 2. FINANCIAL STATEMENTS AND SCHEDULES (included in Parts II and IV of this report). The financial statements are listed in the Index to Financial Statements on page 9. No schedules are required to be filed. (A)3. EXHIBITS: (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: *(a) Merger Agreement, dated as of September 20, 1983, between Williams and Northwest Energy Company ("Energy") (Exhibit 18 to Energy schedule 14D-9 (Amendment No. 3) dated September 22, 1983). *(b) The Plan of Merger, dated as of November 7, 1983, between Energy and a subsidiary of Williams (Exhibit 2(b) to Pipeline report on Form 10-K, No. 1-7414, filed March 22, 1984). (3) Articles of incorporation and by-laws: *(a) Restated Certificate of Incorporation (Exhibit 3a to Amendment No. 1 to Registration Statement on Form S-1, No. 2-55-273, filed January 13, 1976). *(b) By-laws, as amended (Exhibit 3c to Registration Statement on Form S-1, No. 2-55273, filed December 30, 1975). (4) Instruments defining the rights of security holders, including indentures: *(a) Note Purchase Agreement, dated as of April 15, 1982, between Pipeline and Teachers Insurance and Annuity Association of America relating to Adjustable Rate Notes, due March 31, 2002 (Exhibit (a)4(e) to Energy Report on Form 10-Q for the quarter ended June 30, 1982, No. 1-7987). *(b) Debenture Purchase Agreement, dated as of June 6, 1986, between Pipeline and certain institutional investors relating to the 8.75% Series A Debentures, due 1996, 9.0% Series B Debentures, due 2001 and 9.25% Series C Debentures, due 2006 (Exhibit 4(n) to Pipeline Report on Form 10-K, No. 1-7414, filed March 31, 1987.) *(c) Indenture, dated as of November 15, 1988, between Pipeline and The Chase Manhattan Bank, relating to Pipeline's 10.65% Debentures (Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-3, No. 33-25512, filed November 18, 1988). *(d) Senior Indenture, dated as of August 1, 1992, between Pipeline and Continental Bank, N.A., relating to Pipeline's 9% Debentures, due 2022 (Exhibit 4.1 to Registration Statement on Form S-3, No. 33-49150, filed July 2, 1992). *(e) Senior Indenture, dated as of November 30, 1995 between Pipeline and Chemical Bank, relating to Pipeline's 7.125% Debentures, due 2025 (Exhibit 4.1 to Registration Statement on Form S-3, No. 33-62639, filed September 14, 1995). *(f) Second Amended and Restated Credit Agreement dated as of July 23, 1997, by and among Pipeline, Williams, Texas Gas Transmission Corporation, Transcontinental Gas Pipe Line Corporation, Williams Holdings of Delaware, Inc., Williams Communications Solutions, LLC, and Citibank N.A., as agent, and the banks named therein (Exhibit 4(c) to Williams Form 10-K for the year ended 1997, Commission File Number 1-4174). *(g) Senior indenture, dated as of December 8, 1997 between Pipeline and The Chase Manhattan Bank, relating to Pipeline's 6.625% Debentures, due 2007 (Exhibit 4.1 to Registration Statement on Form S-3, No. 333- 35101, filed September 8, 1997. -27- 30 (10) Material contracts: (c) *(1) Form of Transfer Agreement, dated July 1, 1991, between Pipeline and Gas Processing (Exhibit 10(c)(8) to Pipeline Report on Form 10-K, No. 1-7414, filed March 26, 1992). *(2) Form of Operating Agreement, dated July 1, 1991, between Pipeline and Williams Field Services Company (Exhibit 10(c)(9) to Pipeline Report on Form 10-K, No. 1-7414, filed March 26, 1992). (23) Consent of Independent Auditors (27) Financial Data Schedule (submitted to the SEC for its information). (B) REPORTS ON FORM 8-K: No reports on Form 8-K have been filed by Pipeline during the last quarter of the period covered by this report. - --------------------- *Exhibits so marked have heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and are incorporated herein by reference. -28- 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST PIPELINE CORPORATION (Registrant) By /s/ Brian E. O'Neill --------------------------------- Brian E. O'Neill, President Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title --------- ----- /s/Keith E. Bailey Chairman of the Board and Director - ---------------------------------- Keith E. Bailey /s/Brian E. O'Neill President (Principal Executive Officer) and Director - ---------------------------------- Brian E. O'Neill /s/J. Douglas Whisenant Sr. Vice President and General Manager and Director - ---------------------------------- J. Douglas Whisenant /s/Nick A. Bacile Vice President and Treasurer (Principal Financial Officer) - ---------------------------------- Nick A. Bacile /s/Curtis C. Kennedy Controller (Principal Accounting Officer) - ---------------------------------- Curtis C. Kennedy
Date: March 27, 1998 -29- 32 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23 Consent of Independent Auditors 27 Financial Data Schedule
EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-35101) of Northwest Pipeline Corporation and in the related Prospectus of our report dated February 13, 1998, with respect to the consolidated financial statements of Northwest Pipeline Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Tulsa, Oklahoma March 26, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 627 0 26,873 0 10,619 151,933 1,471,027 570,521 1,125,439 156,635 408,287 0 0 1 425,461 1,125,439 0 273,083 0 148,624 0 0 39,565 87,802 30,626 57,176 0 0 0 57,176 0 0
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